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Hedging definition
Hedging is a risk-management strategy that opens an offsetting position to reduce the potential loss on an existing trade or portfolio. The offsetting position itself is called a hedge, and it is built to gain value when the original position loses value.
Hedging works across forex, stocks, commodities, indices, options, futures, and CFD markets. A hedge can be an opposite position in the same instrument, a position in a related asset, or a derivative such as an option or futures contract that moves the other way.
Hedging is the opposite of running an unhedged, directional position that is fully exposed to the market. A hedge lowers downside risk but does not remove it, and it also caps upside while adding costs such as option premiums, spreads, commissions, or overnight fees.
Hedging Example
You hold a long position in gold CFDs because you expect gold to rise.
Before a major US inflation report, you expect higher volatility and open a smaller short gold CFD position as a hedge.
If gold falls after the report, the long position loses value while the short hedge gains and offsets part of the loss. If gold rises, the long position gains while the short hedge gives back part of the profit.
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